We consider the client’s risk profile and the proximity of the goal when deciding on the debt equity ratio.
E.g. let's say you have two clients. One is aggressive and the other is conservative. Now, for both these clients, for a goal that is 10 years away in each case, the asset allocation for the aggressive investor would have a higher equity component compared to the conservative investor.
Second aspect is the proximity of the goal: Considering the proximity of the goal if it’s a short term goal we suggest greater investment in debt as compared to equity. This is because in the short term there is not enough time to see through the volatility in the equity investments. On the other hand if it’s a long term goal then we suggest higher investment in equity as compared to debt. That’s because the client has a long time to face the ups and downs of the market and hence can take more risk.
Let's understand this with an example.
- Goal Type (entered by you) : Marriage
- Goal Year (entered by you) : 2030
- Goal Present Value (entered by you) : Rs.10,00,000
-
Asset Allocation bifurcation (system generated - but can be changed by you ) : See table below
Year Equity Allocation Debt Allocation 2016-2023 100% 0% 2023-2025 75% 25% 2025-2027 50% 50% 2027-2029 25% 75% 2029-2030 0% 100%
Important to note that we do not assume that the asset allocation will change by this ratio as the year progress. We rather take a weighted average approach and derive an average asset allocation that will be required throughout the period of the goal. This is done so that the portfolio isn't changed too often and takes care of market volatility. Having said that, we will be building asset allocation triggers that will show up based on extreme market movements which may call for a tactical shift in the asset allocation.
For any more queries, send an e-mail to support@futurewise.co.in